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The value of different customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and share-of-wallet
Timothy L. Keiningham
IPSOS Loyalty, Parsippany, New Jersey, USA

Customer satisfaction and loyalty 361

Bruce Cooil
Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee, USA

Lerzan Aksoy
College of Administrative Sciences and Economics, Koc University, ¸ Istanbul, Turkey

Tor W. Andreassen
Norwegian School of Management, Department of Marketing, Oslo, Norway, and

Jay Weiner
IPSOS Insight, Minneapolis, Minnesota, USA
Abstract
Purpose – The purpose of this research is to examine different customer satisfaction and loyalty metrics and test their relationship to customer retention, recommendation and share of wallet using micro (customer) level data. Design/methodology/approach – The data for this study come from a two-year longitudinal Internet panel of over 8,000 US customers of firms in one of three industries (retail banking, mass-merchant retail, and Internet service providers (ISPs)). Correlation analysis, CHAID, and three types of regression analyses (best-subsets, ordinal logistic, and latent class ordinal logistic regression) were used to test the hypotheses. Findings – Contrary to Reichheld’s assertions, the results indicate that recommend intention alone will not suffice as a single predictor of customers’ future loyalty behavior. Use of a multiple indicator instead of a single predictor model performs better in predicting customer recommendations and retention. Research limitations/implications – The limitation of the paper is that it uses data from only three industries. Practical implications – The presumption of managers when looking at recommend intention as the primary, even sole gauge of customer loyalty appears to be erroneous. The consequence is potential misallocations of resources due to myopic focus on customers’ recommend intentions. Originality/value – This is the first scientific study that examines recommend intentions and its impact on retention and recommendation on the micro (customer) level. Keywords Customer retention, Customer loyalty, Customer satisfaction Paper type Research paper

Managing Service Quality Vol. 17 No. 4, 2007 pp. 361-384 q Emerald Group Publishing Limited 0960-4529 DOI 10.1108/09604520710760526

MSQ 17,4

362

Introduction Enhancing customer loyalty has become a popular topic for managers, consultants, and academics. The arguments in support of loyalty are simple to understand. Loyal customers are reported to have higher customer retention rates, commit a higher share of their category spending to the firm, and are more likely to recommend others to become customers of the firm (Reichheld and Earl Sasser, 1990; Zeithaml, 2000). To monitor their performance and guide improvement efforts with regard to customer loyalty, managers frequently rely on customer feedback systems. This feedback typically is obtained through customer surveys that contain measures of satisfaction, repurchase intention, and word-of-mouth intention (Morgan and Rego, 2006). The inherent belief among managers is that these measures serve as leading indicators of customers’ future firm-related behaviors (e.g., retention, share-of-wallet allocation, and word-of-mouth). Research has examined most of these commonly used customer satisfaction/loyalty metrics and subsequent customer behaviors. These examinations however have tended to focus on bivariate relationships such as repurchase intention and repurchase behavior (Chandon et al., 2005; Morwitz et al., 1997), customer satisfaction and share-of wallet (Keiningham et al., 2003), complaint intention and complaining behavior (Oh, 2006). Additionally, there is no consensus as to the best means of gauging customer loyalty (Uncles et al., 2003). Since the goal of managers is to enhance different customer loyalty outcomes simultaneously (e.g., retention, share-of-wallet, customer referrals), however, there is a desire among managers to find the optimum gauge of customer loyalty that will result in favorable outcomes on multiple behavioral criteria. Noted loyalty consultant, Frederick Reichheld, argues that of all commonly used loyalty metrics, recommend intention is by far the best at predicting customers’ actual loyalty behavior (purchase and recommendations) (Reichheld, 2003). Reichheld bases this assertion on research conducted in partnership with Satmetrix Systems and Bain & Company (Reichheld, 2003; Satmetrix, 2004). In particular, Reichheld (2003, p. 50) states, “The data allowed us to determine which survey questions had the strongest statistical correlation with repeat purchases or referrals . . . One question was best for most industries. ‘How likely is it that you would recommend [company X] to a colleague or friend?’ ranked first or second in 11 of the 14 cases studied. . .Interestingly, creating a weighted index – based on the responses to multiple questions and taking into account the relative effectiveness of those questions – provided insignificant predictive advantage”[1]. This research served as the micro-level (customer-level) analysis from which the Net Promoter loyalty metric was ultimately created[2]. Thus far, however, there have been no peer-reviewed, scientific investigations examining the relationship between recommend intention and customer behaviors (outside of customer referral/complaining behavior). This research seeks to examine the relationship between responses to commonly used satisfaction and loyalty survey questions, including recommend intention, and their relationship to future customer behavior: purchasing (retention and share-of-spending), and recommendations. The data for this study comes from a longitudinal study of over 8,000 customers of firms in one of three industries (retail banking, mass-merchant retail, and Internet service providers (ISPs)). Customer ratings of common satisfaction and loyalty metrics

Even without a precise definition of the term. The seminal SERVQUAL framework of Parasuraman et al. and customers’ characteristics (Bolton and Drew. Perkins-Munn et al.. 2006 (p. 1988.. called “expectancy disconfirmation” is a strong predictor of customer satisfaction (Oliver. the American Customer Satisfaction Index (ACSI) measures customer expectations as a component of its satisfaction index (Merz. 1994). 1983. p.were monitored over two years.e. 2001). 80) recommends a value question similar to the following. 1998. 2001. 1994). Parasuraman et al. LaBarbera and Mazursky. 2005). Gale (1994. customer satisfaction is clearly understood by respondents. 1980. 170) observe that this is “because it is generic and can be universally gauged for all products and services (including nonprofit and public services)[3]. Customer satisfaction and loyalty 363 . Additionally. Consumers’ perceptions of value are influenced by differences in monetary costs. The relative performance of companies on a “perceived value” metric used in CVA was linked to firms’ relative market share (Clark et al. 1991. Customer value (worth what paid for) According to Zeithaml (1988). research has shown a link been satisfaction and customer retention (Anderson and Sullivan. The value metric was typically defined as customers’ responses to a “worth what paid for” question (Bowden. 1993. service quality to repurchase intention to retention to firm financial outcomes. 2003. Loveman. Consultant Bradley Gale popularized the use of a technique called Customer Value Analysis (CVA) (Gale. Rust et al. 1999). 1973.” With regard to satisfaction’s relationship to customer behavior. Mittal and Kamakura. 1985.. 1999. Zeithaml et al. 1993. and its meaning is easy to communicate to managers. Customer expectations Customer satisfaction is strongly influenced by customer expectations... 1998. Keiningham et al. As a result. 1995). Zeithaml et al.. 2005). Customer metrics Customer satisfaction By far. the most commonly used customer perceptual metric by managers is satisfaction (Gupta and Zeithaml. 1991).. non-monetary costs. 2005.. many managers and researchers have chosen to explicitly measure the extent to which a product/service meets customers’ expectations. The gap between perceived quality and expected quality. (1996) propose a methodology for linking service quality measures to financial outcomes: in particular. Specifically. 1993. Zeithaml et al.. customers’ tastes. 2007). 1998. 1995) and customers’ share of category spending (i. customers’ purchasing (retention and share-of-category spending) and referral behaviors were also tracked.. Clark et al. 1996) conceptualized and operationalized service quality as the gap between customers’ expectations and perceptions (Parasuraman et al. Rust and Zahorik. “perceived value is the customer’s overall assessment of the utility of a product based on perceptions of what is received and what is given”. Newman and Werbel.. Sambandam and Lord. As a result. share-of-wallet) (Keiningham et al. 1995. Bolton. in the second year of the study. Jones and Earl Sasser. Varki and Colgate. many managers adopted the CVA approach.

. For Internet service providers (ISPs). Customer retention In our investigation.. Repurchase intention Researchers have long used repurchase intentions to help predict future purchasing behavior. Christopher et al. it is continuing to use the same provider. Thus far. Recommend intention Word-of-mouth intention has been of importance to researchers for at least the past thirty years. This emphasis is largely the result of early research. 1988).e. In an analysis of actual conversations in numerous discussions forums on the Internet.MSQ 17. For retail banks. Jones and Earl Sasser. Much of the research regarding customer satisfaction and customers’ actual behavior has focused on the relationship between satisfaction and retention. And for discount retailers. attitudinal loyalty is often described as preference for the brand (Bennett and Rundle-Thiele. 1997). brand preference may in fact be regarded as a higher order construct in the sense that “preference” would likely be an outcome based upon customers’ expectations or experience (i. 1991. there is very little scientific research relating recommend intention to actual recommendations. As noted earlier. the degree to which consumers prefer specific brands relative to competing alternatives is an important component of customers’ brand loyalty (Rundle-Thiele and Mackay. which identified customer retention as 364 .. 1991. While the correlation between intentions and repurchase is not perfect. 2005. it is continuing to maintain an account relationship with the bank. Chandon et al. Morwitz et al. however. satisfaction). loyalty expert Fred Reichheld (2003) argues that recommend intention is the best metric at predicting not only customers’ recommending behavior. Jamieson and Bass. 2005. it is the continued repeat shopping with the retailer.. In marketing literature. Early research regarding word-of-mouth tended to focus on complaining behavior (for example. 1993. are they worth what you paid for them?” Brand preference Marketers have long understood the importance of a brand’s inclusion in a consumer’s “evoked set” (the subset of brands that will be considered for purchase on any given occasion) to the ultimate success of the brand. (2006) documented recommendations as one of four unique dialogues taking place. Therefore. but also their purchasing behavior. Additionally. Morrison. 1995. the focus has shifted to recommendations and customer advocacy (for example..4 “Considering the products and services that your vendor offers.. 2001). Brown et al. As such. brand preference has been shown to interact with customer satisfaction to impact customers behavioral loyalty (as measured by share-of-wallet) (Keiningham et al. a number of researchers have examined various factors influencing this relationship (Bemmaor. Singh. 1989. 1979. More recently. 2002). Morwitz et al. 1995). Andreassen et al. Gronhaug and Kvitastein. 2005). customer retention is defined as customers’ stated continuation of a business relationship with the firm.

customer recommendations represents whether or not the respondent actually recommended the firm or brand to another person. 2001). Rust et al. p. Reichheld and Kenny. or a service offered for sale”. 1999.e. 1996. share-of-wallet is defined as the stated percentage of total assets held at the bank being rated by the customer[4]. Managerially. 261) defined word-of-mouth as: “informal communication directed at other consumers about the ownership. share of wallet). it is the stated percentage of total purchases from discount retailers conducted at the retailer being rated by the customer. share-of-wallet is not measured for this industry. respondents to the bank and retail surveys were asked to report their recent trend in spending in the category with the specific firm under investigation. Cunningham.. In fact. 2004. the widely used RFM (recency. it is frequently used by researchers to operationalize loyalty behavior (for example. Soderlund et al. 1970). Heskett et al.. 2006. Wind. 2000. 1995).. Bowman et al. Reichheld and Earl Sasser. 2000. For discount retailers. While this is likely an overstatement. usage or characteristics of particular goods and services and/or their sellers”. Bowman and Narayandas. Hypothesis development Most models of satisfaction and loyalty tend to view the relationship among metrics as being hierarchical (for example. For all industries investigated. 1961. 1956. Researchers Jones and Earl Sasser (1995. p. McKinsey & Company reports that efforts to improve customers’ share of spending and customer retention can add as much as ten-times greater value to a company than focusing on retention alone (Coyles and Gokey.. 2002). a focus on improving customers’ share-of-wallet has been found to have greater financial impact than by focusing on customer retention. as share of wallet is not as forward looking as other measures of loyalty (Oliver. 1999).. person-to-person communication between a perceived non-commercial communicator and a receiver concerning a brand. 94) assert. 1968. Reichheld et al.a key driver of firm profitability (Reichheld. Anderson and Mittal. 1994. the hierarchy would be expected to flow as follows: customer perceptions to behavioral intentions to customer Customer satisfaction and loyalty 365 . 2000. of course. Parasuraman et al. To provide a gauge of past behavior. Customer recommendations Arndt (1967. 190) in his seminal work defined word-of-mouth as “oral. Miglautsch. Because customers of ISPs overwhelmingly use only one service provider (outside of their work environment).. Brody and Cunningham. Share-of-wallet For retail banking. Two decades later Westbrook (1987. Cunningham. Trend in spending It is a well-known maxim in marketing that past customer behavior tends to be a relatively good predictor of future customer behavior (Sheeran et al. 1990). monetary value) segmentation approach used by direct marketers is based upon this truth (Keiningham et al. a product. “the ultimate measure of loyalty. 2002).. 1988. 1990.. is share of purchases in the category” (i. Simplistically. p. frequency. 1993.

customer perceptions. customer experience). A number of researchers have examined the relationship between repurchase intention and repurchase behavior (Bemmaor. value. Reichheld (2003) and Satmetrix (2004) specifically measured two types of behavioral intentions: repurchase intention and recommend intention. . in the case of the findings presented by Reichheld (2003) regarding the superiority of recommend intention in linking to customers’ loyalty behaviors than other metrics. While the logic of a hierarchical process is both commonsensical and theoretically supported. In particular. in other words. manage an outcome (i. For example. finds that satisfaction is a necessary step in loyalty formation. In other words. Jamieson and Bass.. 1996) reflect this common management perception. most notably singling out customer satisfaction measurement as inferior. as opposed to perceptions of their experience. intentions) instead of a cause (i. 1980) from attitude theory.e. This would appear to be the case based upon Reichheld’s (2003) finding that a behavioral intention metric was more closely linked to customer behavior than measures of customers’ satisfaction with the product/service experience. Intentions (repurchase and recommendation) will be more strongly correlated to customer behavior than customers’ perceptions of satisfaction. based upon the current literature.MSQ 17. book titles such as Customer Satisfaction Is Worthless: Customer Loyalty Is Priceless (Gitomer. 2005. Consultants and business managers frequently ignore or misunderstand the hierarchical and differentiating characteristics of each link in the chain of effects from satisfaction to intentions to behavior. Oliver (1999). 1998) and Beyond Customer Satisfaction to Customer Loyalty (Bhote. Therefore we offer five hypotheses. Reichheld argues that recommend intention performs better than many questions designed to assess customers’ perceptions of their experience. variables that are closer to the outcome should have a stronger relationship compared to variables that are earlier in the chain. we hypothesize: H1. there are notable gaps in the current literature from which to accurately gauge the reasonableness of the findings. behavioral intentions. and expectations. As a result. 1989.4 366 behavior. Hypotheses As noted earlier. in the chain of effects. and customer behavior are widely believed to be hierarchical constructs. Chandon et al. the strength of the relationship between extremes in the continuum should be less than for adjacent constructs. 1995. and that for many firms is the only feasible goal to enhance loyalty for which they can strive.e. This logic has a close resemblance to the theory of reasoned action (Ajzen and Fishbein. however. which address fundamental aspects of Reichheld’s (2003) findings. it is not uncommon to hear consultants and managers say that something to the effect that they have gone “beyond” customer satisfaction to measuring customer loyalty. 1979. Morrison. Reichheld’s (2003) position in effect argues that firms should manage customer intentions. Hence. Since are hierarchical. Reichheld (2003) makes a similar argument in his research regarding the relationship between responses to various questions asked in a customer survey and customers’ subsequent loyalty-based behaviors.

and expectations. Reichheld (2003) argues. Perkins-Munn et al. and customers’ recommend intention. value. and expectations. Reichheld (2003. we believe that each intention metric is gauging a distinct customer behavior. Reichheld (2003) and Satmetrix (2004) provide the only research into this specific issue. recommend intention would be expected to more closely correlate to share of wallet. 1991. however. Repurchase intention will be more strongly correlated to repurchase behavior than recommend intention.e. repurchase or recommendation). of course. This would appear to be supported by empirical research. given the findings of Perkins-Munn et al. 94) assert. 2000).e. and customers’ perceptions of satisfaction. and expectations. argues that recommend intention is the best metric for gauging customers’ loyalty behaviors. increased share of category spending/share of wallet) is a major contributor to profits through increased customer loyalty. Currently. A body of research similarly exists examining the relationship between word-of-mouth intention and word-of-mouth behavior (Brown et al. we hypothesize: H4. p. Reichheld (2003) and Satmetrix (2004) provide the only research into this specific issue (and it is unclear as to how they integrated share of wallet into their measure of customers’ purchasing behaviors). it is important to point out that each intention metric is designed to predict a specific customer behavior (i. is share of purchases in the category” (i. p. 1995. Again. Singh. (2005). Reichheld (2003). Christopher et al. however.Morwitz et al.. value. H3.e. Recommend intention will be more strongly correlated to recommend behavior than repurchase intention.. and that retention and share-of-wallet. Reichheld and Earl Sasser (1990) argue that “profit from increased purchases” (i. 2005. and customers’ perceptions of satisfaction. that recommend intention suffices as a predictor for both types of customer behavior.. 1991. 1993. Coyles and Gokey (2002) find that efforts to improve customers’ share of spending and customer retention can add as much as ten-times greater value to a company than focusing on retention alone. while not identical. therefore. 50) states. 1988). Researchers Jones and Earl Sasser (1995. Jones and Earl Sasser. Despite their findings. and customers’ perceptions of satisfaction. are closely related and hence can at times be used as proxies for one another. (2005) found a strong relationship between repurchase intentions and actual repurchase. Therefore any metric designed to best gauge customer loyalty would need to assess its relationship to share of wallet. “the ultimate measure of loyalty. Therefore.. Therefore. however. While seemingly obvious. Share-of-wallet is a topic of increasing importance among both managers and academics (Zeithaml. Repurchase intention will be more strongly correlated to share-of-wallet than recommend intention. value. based upon this assertion. we hypothesize: H2. “creating a weighted index – based on the responses to multiple questions and taking into account the relative effectiveness of those questions Customer satisfaction and loyalty 367 . Gronhaug and Kvitastein. share of wallet). 1997). Morwitz et al.

customers’ stated purchasing (retention and share-of-category spending) and referral behavior were also tracked. researchers have shown that typically single item measures are less reliable than multi-item scales/constructs (Wanous and Hudy. In addition to the questions surveyed in the initial study. mass-merchant retail. our study examined customer behaviors associated with customer loyalty. customer retention.MSQ 17. Wanous et al. and Internet service providers (ISPs)). 2001. respondents were screened based upon being active customers of one of the firms/brands under investigation. SOWt 2 SOWt2 1). The research firm provides incentives to members to continue participation in the panel. 1997). customer value (defined as “worth what paid for”). As dependent variables. This finding is highly unexpected. A follow-up survey was conducted approximately one year after the initial survey. 1996. The data The data for this study comes from a longitudinal study of over 8. and is structured and maintained so that market researchers can obtain and survey USA consumers based upon their desired demographic profiles. As we expect recommend intention to be more strongly correlated to recommend behavior. In the case of this research. As predictor variables. Customers were surveyed regarding their experience with the brand/firm. Additionally. it would appear more logical to expect that these two behavioral intention metrics would significantly contribute to a model designed to predict these customer behaviors. and customer recommendations. four behaviors were investigated: change in share-of-wallet (i. Our research examined several of the most common customer perception metrics (customer satisfaction. and repurchase intention to be more highly correlated to customers’ repurchasing behavior. customer expectations. SOW. The panel is proprietary to a large market research provider. Table I presents the attitudinal questions used and their corresponding rating scales. Analysis Creation of recoded variables Reichheld (2003) and Satmetrix (2004) used Pearson correlations to test the strength of the relationship between various satisfaction/loyalty survey questions and subsequent customer behaviors (purchase and recommendations).000 customers of firms in one of three industries (retail banking. two stated behavior metrics were investigated (from the initial survey period): recent trend in spending within the industry and for the firm (see Table II). we hypothesize that: H5.e. Satmetrix (2004) reports: . Wanous and Reichers. Survey researchers frequently use customer attitudinal and perceptual metrics to aid in predicting customers’ future behaviors.. Furthermore. Therefore.4 368 – provided insignificant predictive advantage” when compared to the use of a single recommend intention question. A multivariate model will be significantly better at predicting both customers’ repurchase and recommend behaviors than a univariate model containing only recommend intention. and brand preference) and two widely used behavioral intention metrics (repurchase intention and recommend intention).

. how satisfied are you with (Company or Brand X)? (1-10 scale) 10 Completely satisfied 1 Completely dissatisfied How well has (Company or Brand X) met your expectations? (1-10 scale) 10 Completely failed to meet expectations 1 Greatly exceeded expectations Using a scale from 1 to 10 with 1 being Strongly Disagree and 10 being Strongly Agree please tell me how much you agree with the statement (Company or Brand X) is worth what I pay for it (1-10 scale) 10 Strongly agree 1 Strongly disagree Six/twelve months from now.Taking into account your total experience. please select the one that comes closest to your feelings (regarding Company or Brand X) (1-5 scale) 5 I prefer them to all the other (firms/brands in category) 4 They are one of a few I prefer to other (firms/brands in category) 3 They are acceptable. but I have no particular preference for them 2 I somewhat prefer other (firms/brands in category) 1 I strongly prefer other (firms/brands in category) Customer satisfaction and loyalty 369 Table I. overall. three months (retail)) would you say that the total value of your (savings and investments/purchases) at (all firms/brands in category) you use has. . Satisfaction/loyalty questions investigated Over the last (year (bank). Trend in spending questions investigated (banking and retail surveys only) . three months (retail)) would you say that the total value of your (savings and investments/purchases) at (Company or Brand X) has. . how likely are you to still be using (Company or Brand X)? (1-5 scale) 5 Definitely will be using them 4 Probably will be using them 3 Might or might not be using them 2 Probably will not be using them 1 Definitely will not be using them How likely would you be to recommend (Company or Brand X) to friends and colleagues? (1-5 scale) 5 Definitely would recommend them 4 Probably would recommend them 3 Might or might not recommend them 2 Probably would not recommend them 1 Definitely would not recommend them Of the following list of statements. .? (1-5 scale) 5 Increased a lot 4 Increased a little 3 Stayed the same 2 Decreased a little 1 Decreased a lot Over the last (year (bank).? (1-5 scale) 5 Increased a lot 4 Increased a little 3 Stayed the same 2 Decreased a little 1 Decreased a lot Table II.

4. 5 rating levels were found to be highly significant (i. p . the groupings based upon the 1-3. so that we can better compare and contrast our findings with those of Reichheld (2003) and Satmetrix (2004). . 5 rating levels were highly significant (i. 7-8 recoded to 2. if customers reported that they were likely to recommend a particular company to a friend or colleague. however. used a five point rating scale. in each case. Reichheld (2003) uses a 0-10 scale where the end anchors are labeled “extremely likely-not at all likely”. Customers were segmented into three categories based on their “recommend” ratings and their combined purchase and referral rates.e. . 0. More explicitly. however. [the] results of this analysis also led to the discovery of a classification scheme. Using these groupings. Correlation analysis Table III presents the median within industry correlations of the attributes under investigation with subsequent customer behaviors associated with customer loyalty.0001). . In each case.MSQ 17. ` To empirically confirm the validity of this three-segment grouping vis-a-vis the variable’s relationship to customer behavior. r . SQRTð0:1Þ ¼ 0:32). In the second analysis. . new three-segment (recoded) variables were created for all attitudinal variables under investigation. 4 recoded to 2.e. . chi-square tests were conducted using a combined variable of customer recommendations and retention[5] by recommend intention level for each industry (Figure 2).e. we created a new three-segment repurchase intention variable (i. and 0-6. (Note that Reichheld (2003) and Satmetrix (2004) report examining the correlation of variables on repurchase (retention) and referral (recommendation) behavior). customers can be characterized in terms of their joint profile of “what they say” and “what they will actually do”. 0. and 5 recoded to 3. The scale was segmented into three groups: ratings of 9-10. we conducted two separate chi-square tests.e. As a result. The repurchase intention variable in our study. Because our scales differ from those used by Reichheld (2003)/Satmetrix (2004). . the groupings based upon the 1-3. Variables that used a five-point scale (repurchase intention. 7-8.4 370 . p . whereby customers can be grouped according to their joint loyalty and behavioral profiles . but also that the groupings demonstrated high empirical validity in terms of the recoded variable’s relationship to the customer behaviors investigated by Reichheld (2003). chi-square tests were conducted for customer recommendations by recommend intention level for each industry (Figure 1). and customer value (worth what paid) were recoded as follows: 1-6 recoded to 1.01 level (2-sided). As a result. the analyses strongly support this three-segment grouping. we wanted to be certain that our three cluster groupings were not only as similar as possible. The first thing to note is that the vast majority of variables investigated explain less than 10 percent of the variance in the relationship (i. 4. the five-point scale was recoded into a three-point scale). recommend intention. Given . Again. All values greater than 0. the likelihood to recommend question proved to be the top correlate to actual customer behavior 80 percent of the time. and 5. it would appear that the comparable groupings would be ratings of 1-3. then these same customers were also likely to actually repurchase from the company. and brand preference) were recoded as follows: 1-3 recoded to 1. Variables that used a ten-point scale (overall satisfaction. as well as generate new business by referring the company via word-of-mouth . In the first analysis. 4. Based upon the Reichheld (2003) groupings.0001).022 are significant at the 0. To be able to make apples-to-apples comparisons for all variables under investigation. expectations. and 9-10 recoded to 3.

Chi-squared tests for customer recommendations by recommend intention level the relatively modest correlation strength. With regard to H1. this hypothesis is not supported. and expectations. The correlations in Table III clearly show that attitudes and intentions associated with customer loyalty differ in the strength of association to various customer behaviors. The finding. Furthermore. and recommend intention best predict future recommendations. it appears questionable that any single attitudinal measure alone would best gauge future customer behavior.Customer satisfaction and loyalty 371 Figure 1. are supported. value. H2 and H3 that repurchase intention best predicts retention. In general. . that repurchase and recommend intentions will be more closely related to customer behavior than customer perceptions of satisfaction. industry type impacts the association between customer attitudes and their subsequent behaviors.

MSQ 17. Chi-squared tests for retentionrecommendations combined by recommend intention level .4 372 Figure 2.

30 0.16 20.33 0.41 0.19 0.35 0.21 0.32 0.36 0.21 0.07 0.21 0.19 0.13 0.08 0.09 0.34 0.41 0.41 0.10 0.39 0.29 0.43 0.21 0.09 0.16 0.30 0.08 Recommend SOW and retain Retain Recommend 0.03 0.33 0.11 0.30 0.24 0.09 0.14 0.42 0.35 0.13 0.10 0.20 0.06 0.41 0.26 0.31 0.09 0.15 0.12 0.40 0.10 0.38 0.32 0.35 0.43 0.10 0.29 0.19 0.18 0.34 0.10 0.12 0.14 0.25 0.06 0.10 0.07 0.03 0.36 Customer satisfaction and loyalty 373 Table III.15 0.15 0.18 0.03 0.00 0.28 0.01 0.19 20.09 0.34 0.29 0.05 0.40 0.36 0.19 0.22 0.25 0.13 0.38 0.28 0.00 0.10 0.06 0.26 0.27 0.16 0.33 0.14 0.31 0.15 0.33 0.09 0.01 0.26 0.36 0.16 0.22 0.11 0.07 0.15 0.17 0.08 0.31 0.34 0.17 0.16 0.Change in SOW Banking Share of wallet t 2 1 (initial period) Recommend intention (recoded into 3 groups) Recommend intention Repurchase intention (recoded into 3 groups) Repurchase intention Overall satisfaction (recoded into 3 groups) Overall satisfaction Worth what paid (recoded into 3 groups) Worth what paid Expectations (recoded into 3 groups) Expectations Brand Preference (recoded into three groups) Brand preference Trend in total spend/savings in category Trend in spending/savings with individual firm Retail Share of wallet t 2 1 (initial period) Recommend intention (recoded into 3 groups) Recommend Intention Repurchase intention (recoded into 3 groups) Repurchase intention Overall Satisfaction (recoded into 3 groups) Overall iatisfaction Worth what paid (recoded into 3 groups) Worth what paid Expectations (recoded into 3 groups) Expectations Brand Preference (recoded into three groups) Brand preference Trend in total spend/savings in category Trend in spending/savings with individual firm ISP Share of wallet t 2 1 (initial period) Recommend intention (recoded into 3 groups) Recommend intention Repurchase intention (recoded into 3 groups) Repurchase intention Overall Satisfaction (recoded into 3 groups) Overall satisfaction Worth what paid (recoded into 3 groups) Worth what paid Expectations (recoded into 3 groups) Expectations Brand Preference (recoded into three groups) Brand preference Trend in total spend/savings in category Trend in spending/savings with individual firm 2 0.30 0.30 0.20 0.34 0.16 0.15 0.14 0.12 0.11 0.35 0.08 0.25 0.31 0.22 0.28 0.17 0.12 0.16 0.27 0.28 0.37 0.13 0.09 0.35 0.45 0.29 0.14 0.01 0.07 0.31 0. Correlations of survey responses in Time 1 to customer behavior in Time 2 .12 2 0.15 0.37 0.11 0.35 0.08 0.06 0.15 0.13 0.34 0.14 0.17 0.26 0.23 0.22 0.30 0.37 0.32 0.43 0.33 0.31 0.15 0.23 0.08 0.49 0.09 0.06 0.26 0.33 0.31 0.35 0.13 0.36 0.32 0.12 0.14 0.10 0.63 0.23 0.04 0.32 0.43 0.06 0.

and expectations. Repurchase intention is used as the second predictor here because: (1) it is one of the most promising predictors based on the analysis in Table IV and an examination of the correlation tables for the Recommend-Retention variable (see Table III). and customers’ recommend intention. the differences were not always statistically significant. 2: retained and recommended). we used all 15 of the survey response variables (listed in the rows of Table III). Table V summarizes the results for the best single. As candidate predictors. With regard to share of wallet. H4 stated that repurchase intention would be more strongly correlated to share of wallet than customers’ perceptions of satisfaction. 1997). value. Here we focus on models with recommend intention only and with both recommend intention and repurchase intention as predictors. In Table V. Reichheld (2003. p. is not universal. however. 2001. To test the difference between single-predictor and multi-predictor models. Among the ISP firms there is only a marginal increase in R-squared (adjusted) as one goes beyond the best single-predictor model. 1996.MSQ 17. both repurchase intention and recommend intention were found to be almost identical in terms of the strength of association.4 374 however. Retail: 21 percent). Wanous and Reichers. It is important to note that for the combined recommend-repurchase variable. while the receiver-operating characteristic curve (ROCC) area represents the percentage of . 1: retained but did not recommend. past share of wallet tends to be a better predictor of future share of wallet than attitudinal variables. and (2) it is the other variable explicitly examined by Reichheld (2003) and Satmetrix (2004). Single or multi-item measures As noted earlier. brand preference showed equal or stronger relationships to share of wallet than other intention or attitudinal metrics.and multiple-logistic ordinal regressions when using the combined Recommend-Retention variable as the dependent variable (0: not retained. and varies by industry and the type of customer behavior. Nevertheless. This would appear to in part support the marketing literature that defines attitudinal loyalty as a preference for the brand (Bennett and Rundle-Thiele. we conducted two types of analyses. While directionally this is true. First we analyzed the incremental predictive value of multiple-predictor models relative to single-predictor models for Retention within each industry. 50) states that models using multiple items to predict customers’ purchase and recommend behavior provided “insignificant predictive advantage” when compared to the use of a single recommend intention question. the correlations in Table III reveal two other interesting findings.. Wanous et al. but the increase in R-squared (adjusted) is greater than 20 percent in the other two industries (Banks: 25 percent. First. these models all have relatively modest predictive value. percent concordance represents the percentage of times that customer pairs are correctly ranked by the model on the Recommend-Retention scale. As single item measures have been shown to be less reliable than multi-item scales/constructs (Wanous and Hudy. H5 proposes that a multivariate model will perform better than a model consisting only of recommend intention. Second. 2002). We summarize these results in Table IV.

a p .5 7.5 7.5 R2 % Banking Predictor(s) R2 % R2 % Retail Predictor(s) ISP Predictor(s) Best single-predictor model Best two-predictor model Best predictive model Repurchase-intenta Repurchase-intenta Brand preference Repurchase-intentiona Brand preferenceb Satisfactionb Repurchase-intent (3 level)a Repurchase-intenta Brand preferencea 9-Predictor model Repurchase-intent a Repurchase-intenta Recommend-intent (3 level) Same as above: Repurchase-intenta Recommend-intent (3 level) b Notes: All R 2 values are adjusted.4 7. the Best Predictive Model is the model that minimizes the Akaike Information Criterion (AIC).9 6.3 10.3 8.05 (two-sided) Customer satisfaction and loyalty 375 Table IV. Single versus multiple-predictor models for retention by industry .7 9. 0.01 (two-sided). p .4 7. 0.Model type 5.

0.376 MSQ 17. Prediction of recommend-retention based on recommend intention and repurchase intention in ordinal logistic regressions Banking % Concordance ROCC area Retail % Concordance ROCC area 72 74 ISP % Concordance ROCC area 55 64 67 70 . p . all predictor coefficients are highly significant.4 Predictors 52 62 65 67 59 65 Recommend intention only versus repurchase intention only Recommend intention and repurchase intention Notes: In each model.001 Table V.

Second. using firm indicators as covariates. is not supported. Discussion Our investigation found that recommend intention does provide insight into customers’ future recommend behavior. share of wallet. In this model. expectations and recommendation intention (coded into three groups). many firms look at recommend intention as the primary. Our findings call into question the rigor of the research reported by Reichheld (2003) and Satmetrix (2004) with regard to the relationship between various survey-based metrics and subsequent customer behavior. recommend intention was generally not the best predictor for each of these variables. we looked at all firms together. We reach this conclusion based upon three primary findings. the percent concordance increases by 18. First. (2007) on their macro-level analysis. Third. firm indicators are used as covariates along with the three attitudinal covariates: repurchase intention. (Our findings on the micro-level analysis of Reichheld (2003)/Satmetrix (2004). and therefore it supercedes and makes irrelevant other measures. This model misclassifies customers at a rate of 11 percent. however. It misclassifies customers at a rate of 24 percent. multivariate models universally outperformed models that use only recommend intention. In large part. 2000).001). 1990. 0. and using a reweighted maximum likelihood procedure to give each firm equal representation in the analysis. Retail and ISP industries. These findings have clear implications for managers.correct rankings of customer pairs when predicted ties are resolved randomly. however. The consequences are the potential misallocation of Customer satisfaction and loyalty 377 . We experimented with employing each of the basic attitudinal variables as either a covariate (for classifying customers to segments) or as a within-segment predictor of Recommend-Retention. and 16 percent for firms in the Banking. The belief is that this metric best tracks customers’ future loyalty behavior (and ultimately firm growth). in terms of the Bayesian Information Criterion (BIC). In this case. bivariate correlations of all the attitudinal variables and customer behaviors investigated tended to be modest. using backward and forward stepwise analyses. however. and when it is added to the model. and recommendations) (Reichheld and Earl Sasser. even sole gauge of customer loyalty. The best single-predictor model uses Recommend-Intention across three customer segments (only firm indicators are used as covariates in this case). Reichheld and colleagues have done a service by stimulating debate and research on customer loyalty behaviors. taken in conjunction with the findings of Keiningham et al. 11. We found the best models. In every case repurchase intention has significant incremental value ( p . we studied multi-segment models for the Recommend-Retention dependent variable. 2004). Without question. do not appear to be generalizable. 2003. because of the current popularity of Net Promoter. respectively. Satmetrix. call into question the robustness of the entire study). the presumptions of these managers appear to be erroneous. and it uses recommend intention and worth what paid as predictors across four segments. Based upon our research. The assertion that recommend intention alone will suffice as a predictor of customers’ future loyalty behavior (Reichheld. by fitting latent class regression models. Finally. Zeithaml. Their findings. The best multiple-predictor model is better in terms of BIC. when examining the three primary behaviors associated with customer loyalty (retention.

everyone would already be doing it. but that their WOM was not a recommendation. This implies that firms must balance and manage different aspects of the customer experience simultaneously if they are to optimize the loyalty behaviors they desire from their customers. recommendations only occurred if the customer was actually retained. our research implies that each dimension is likely to be affected by differing aspects of the customer experience. More recently. we have found that it is not straightforward to translate customers’ loyalty attitudes into customers’ loyalty behaviors. it is the stated percentage of the total value of savings and investments at all financial institutions used by the respondent (excluding work related retirement plans and excluding the value of the respondent’s home) held at the bank. 4. and retention with recommendations. Furthermore. there were three categorical outcomes in our retained-recommended variable: defection. Cooil et al. Notes 1.e. but to point to the fact that any single metric designed to explain customer behavior across a diverse customer base is unlikely to be an adequate gauge upon which managers can act. 2006). .4 378 resources due to flawed strategies that are guided by a myopic focus on customers’ recommend intentions.MSQ 17. It is important to note that a macro-level analysis of Net Promoter was also conducted by Reichheld. Additionally. however. there are no simple solutions for turning loyalty into profits. and Satmetrix that linked firm-level Net Promoter scores to relative firm growth rates within their respective industries. Bain & Company. Furthermore. we examine recommendation behavior. As a result. 2. The impact of these dimensions is likely to vary by industry and customer characteristics. our findings demonstrate that customers’ loyalty-based behaviors are multidimensional. stating that Net Promoter yields slightly less accurate predictions for the behavior of individual customers. Specifically. Reichheld has modified this claim. While loyalty is a concept that all managers want. no one metric best predicts all behaviors associated with customer loyalty. Therefore. (2006) demonstrate the importance of segmenting customers based upon their characteristics when attempting to link customer perceptions to customer behaviors. our findings clearly show that aggregate level attitudinal metrics are not strong predictors of customers’ future behaviors as noted by the modest R-squares. defectors did not recommend the brand. Researchers. Satmetrix (2004) and Keiningham et al. have reported being unable to replicate the findings reported by Reichheld (2003). Johnson and Fornell (1991) make the same argument in their work. 5. This is not to discount their importance. If it were easy. Respondents were required to be actual customers of the firm in the initial period to qualify for participation in the study. as they have been found to moderate this relationship. For researchers. however. this implies that holistic models of loyalty will need to be developed to model the impact of these various dimensions of customers’ loyalty behavior on firm financial outcomes. but a far more accurate estimate of growth for the entire business than models consisting of data from multiple survey items to predict firm growth (Reichheld. retention-only. i. As we are seeking to examine the robustness of the Reichheld (2003)/Satmetrix (2004) findings and these papers investigated recommendations. In particular. 3. .this does not mean that they did not engage in WOM. (2007). . As a result.

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58-70.T. 2005 by John Wiley and Sons. poses the fallacies of most of the conventional wisdom surrounding customer loyalty. School of Business. He is the corresponding author and can be contacted at: tim.J. Her article The Brand-Customer Connection. He has received the Highly Commended Paper award from Managing Service Quality and the Most Downloaded Article Award – Top 200 from the Emerald Group Publishing Limited and the Citation of Excellence of Highest Quality Rating by Anbar Electronic Intelligence. He has also written and consulted on models for mortality. the Journal of Service Research. Journal of Service Research. Customer Lifetime Value (with Keiningham and Bejou). Journal of Marketing. Loyalty Myths (with Vavra. He has received best paper awards from the Journal of Marketing.asp Rust. Her articles have been accepted for publication in such journals as Journal of Marketing. Vanderbilt University.. Lerzan Aksoy is assistant professor of marketing at Koc University in Istanbul. He is author of several management books and numerous scientific papers. A. from among 20. Zahorik. She is co-editor of the book. Bain Audio Presentation (text transcript).bain. Customer satisfaction and loyalty 383 About the authors Timothy L. making service quality financially accountable”. His research has been published in such journals as Journal of . Andreassen is Professor and Chair Department of Marketing. medical complications. (1995). and Keiningham. F. “Return on quality (ROQ). Keiningham is senior vice president and head of consulting at Ipsos Loyalty. 2005) by John Wiley and Sons. Circulation. statistics and medical journals.. Tim also received the best reviewer award from the Journal of Service Research.F. Journal of Marketing. Aksoy. His research interests include the adaptation of grade-of-membership and latent class models for marketing and medical research. His publications have appeared in business. pp. was selected by Emerald Management Reviews as one of the top 50 management articles of 2005. Canada) counted Loyalty Myths as the Number 4 best business book of the year. Professor Andreassen is the founder and director of Service Forum and the founder of The Norwegian Customer Satisfaction Barometer at the Norwegian School of Management. and the New England Journal of Medicine. and MIT Sloan Management Review. She ¸ is the co-author of the book Loyalty Myths (with Keiningham et al.000 articles reviewed by that organization in that year. His most recent book. Turkey. and Managing Service Quality. and Journal of Service Research. a MSc in marketing (with honors) from the Norwegian School of Management. large sample estimation theory and extreme value theory. and has received the Citations of Excellence Top 50 award (top 50 management papers of approximately 20. R. including the Journal of Marketing Research. estimation of qualitative data reliability. and Wallard). Additionally. Vol. and automobile insurance claims. The Globe and Mail (Toronto. Journal of the American Statistical Association.L. 2.asp?id ¼ 15294& menu_url ¼ publications_results. and a Doctor of Economics from Stockholm University. February 24. Psychometrika. She serves on the advisory board of the Journal of Relationship Marketing. He holds a Sivilokonom degree from The Norwegian School of Economics and Business Administration. She has received the Outstanding Paper (Best Paper) award from Managing Service Quality and was a finalist for best paper in the Journal of Service Research.com Bruce Cooil is Professor of Management at the Owen Graduate School of Management. His articles have appeared in such publications as Journal of Marketing.Further reading Reichheld. 59 No. Tor W. medical malpractice. available at: www. “Net promoters”. T. Annals of Probability. (2004). two papers that he coauthored were finalists for best paper in Managing Service Quality. Sloan Management Review.keiningham@ipsos-na. Soundview Executive Book Summaries chose Loyalty Myths as one of the 30 best business books of 2006.000 papers reviewed) from Emerald Management Reviews.com/bainweb/publications/publications_detail. 2006 by Haworth Press.

Quality & Quantity.emeraldinsight. and pricing research in refereed conference proceedings.com Or visit our web site for further details: www. Jay’s expertise and work includes pricing. Journal of Public Sector Management. He received his doctorate in marketing from the University of Texas at Arlington. customer and employee loyalty.MSQ 17. Marketing Sciences at Ipsos Insight. choice. Journal of Economic Psychology. in addition to multivariate statistical analyses. discrete choice analysis. Jay Weiner is Senior Vice President. To purchase reprints of this article please e-mail: reprints@emeraldinsight.4 384 Marketing. He specializes in applying advanced methods to help companies make better marketing and business decisions. Jay consults with many Fortune 500 corporations on marketing and marketing research issues. segmentation. and Journal of Service Research.com/reprints . conjoint analysis. Jay has published and presented numerous papers on conjoint.

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